I've been predicting record oil prices for a number of years now, so when crude oil prices recently plunged from their record highs, I warned investors and consumers that the decline was nothing more than a temporary respite.

But the fallout from the current $700 billion banking bailout pact now strongly suggests that my prediction will come true.

As the curtain closed on the third quarter yesterday (Tuesday) – leaving many investors worried that the long-feared "Super Crash" was imminent – crude-oil futures were staring at their first decline in seven quarters and their biggest quarterly decline in 17 years, thanks to worries that a slowing economy would curtail global demand. By the end of trading yesterday, crude oil for November delivery had dropped $39.36 a barrel – or 28% – during the third quarter to close at $100.64.

It's been a volatile market, too. Oil traded within a $56 range during the quarter, reaching a record $147.27 a barrel on July 11 and retreating to as low as $90.51 a barrel on Sept. 16, Bloomberg News reported. Oil futures moved 5% or more during one quarter of the trading days.

Analysts repeatedly said this decline was merely the beginning, and that with a global economy that had been severely singed by the U.S. credit crisis, oil prices had nowhere to go but down.

But I continued to make the opposite argument. And a week ago, the markets made my point for me. On Sept. 22, crude oil futures for October delivery soared $16.37 a barrel, or 15.7%, to close at $120.92, after trading as high as $130 a barrel – thanks to a steep decline in the U.S. dollar and to speculation that the Bush administration's plan to bail out the financial sector might actually jump-start the U.S. economy, fueling inflation in the process. The gain surpassed the previous record single-day-price gain of $10.75 a barrel, a move that occurred on June 6. [The biggest-ever percentage gain in a single day – 20.9% – was recorded on Jan. 3, 1994, according to FactSet Research Systems Inc.]

This record one-day surge a week ago caught many by surprise and jump-started speculation about whether oil prices will rise or fall from here.

Any disciples of doubting Thomas must only look at the reaction to the different phases of the bailout negotiations this week to see that the market has spoken again. Crude oil for November delivery dropped $10.52 a barrel, or 9.8%, to close at $96.37 on Monday after the House of Representatives rejected a Bush administration bailout plan. But that was a knee-jerk reaction to a worry that the lack of a bailout pact might spawn a recession.

Yesterday, however, crude oil futures rebounded $4.27 a barrel, or 4.4%, after analysts realized, upon reflection, that the U.S. economy – together with the global demand for oil – wasn't about to just disappear. And that wasn't even an actual bailout proposal in place. When a pact is signed – as most analysts figure it will be – crude prices will likely rebound even more.

The Outlook for "Black Gold"

In the extreme short term, oil's probably going to bounce around the psychologically important $100-a-barrel mark – if not a little higher – as the U.S. government works to sort out the financial crisis.

The reason is that any "recovery," or bailout, is intended to strengthen the flagging U.S. dollar. And a rising dollar tends to push crude prices lower because crude is traded mostly in U.S. dollars around the world.

So, as much as most of the world looks to Organization of the Petroleum Exporting Countries (OPEC) to determine the price of oil, the more important influencers in the near term actually are U.S. Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. – the Batman (Bernanke) and the Boy Wonder (Paulson) of Washington's bailout set.

The $700 billion banking bailout package proposed by this "Dynamic Duo" directly impacts the flagging U.S. dollar. And the dollar, for reasons we've just explained, helps determine oil prices.

There are exceptions, of course, but the relationship between currencies and oil prices generally suggests that 90% or more of the decline in price that crude oil has experienced since mid-summer can be accounted for simply by how much the dollar has risen since July.

But here's the trick – the reverse is also true.

We mentioned inflationary pressures before. Well, if Congress actually passes the bailout plan, another $700 billion would be pumped into the world financial system. And that would mean far higher prices are ahead. We're talking Econ 101 here: Every one of the bailout bucks dilutes the buying power of every other dollar already in circulation. That erosion in buying power is the textbook definition of inflation.

In fact, that's just how it played out this week. When the bailout plan was rejected Monday, meaning those bailout bucks wouldn't be joining the financial system, oil prices fell precipitously, since there would be no additional inflationary pressures. But when investors started to rethink that thesis Tuesday – meaning they believed some sort of new bargain would be reached – oil prices reversed course and rose in anticipation of that money possibly being pumped into the financial system.

While a bailout could jump-start the financial markets for a while, history suggests that over time the "cost" of the liquidity Bernanke and Paulson have cobbled together may manifest itself in the form of far higher oil prices. Other commodities would rise significantly, too. Investors have only started to see this outcome.

So, what happened back on that Monday, Sept. 22, when oil prices made that record one-day run?

My experience as a professional trader makes me think that somebody simply got trapped on the wrong side of the markets and was trying to cover a humongous position at any cost.

And what I saw on my screens seems to confirm that. It was a late-session spike at a time when traders either had to get in line for delivery or unwind their positions before the October crude futures contracts expired. With a mere 30 minutes remaining, there were no sellers to balance prices, while the market makers who normally would provide a modicum of orderly behavior were nowhere to be found amidst the chaos.

Five Points to Bank On

What's likely to happen longer term? Simple. In fact, here are five points you can take to the bank.

First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 – even with conservation efforts and high prices stunting demand.

Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the "Peak Oil" concept, they now accept it and only question when it will take hold.

Third, the world's fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost – even if that means there's none left for us.

Fourth, the world will learn one day – probably sooner rather than later – that Saudi Arabia's vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as "gospel" in the oil business. Matthew Simmons, chairman of the Houston-based investment bankSimmons & Co. International and author of the seminal 2005 book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," has been most vocal about this alleged shortfall, and I respect his work, especially since I've spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.

Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil's price drop can be attributed to nothing more than the dollar's rise since July. Nothing else has changed.

Should traders see through the smoke and mirrors or simply decide to run for the exits, we can expect to see the dollar shrink to new lows and oil to rise to new highs in a perverse flight to quality.

Only this time, this "quality" is literally quite crude …

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I think people resist freedom because they're afraid of the unknown. But it's ironic….That unknown was once very well known. It's where are souls belong….The only solution is to confront them–confront yourself–with the greatest fear imaginable. Expose yourself to your deepest fear. After that, fear has no power, and fear of freedom shrinks and vanishes. You are free.JamesDouglasMorrisonJames Douglas Morrison, lead singer of The Doors

This article erroneously assumes that alternative energy resources and greener sources will not factor into the consumption equation. Additionally, the Bush policies of "Big Oil" and industry favoritism without any industry regulation are about to end.
Finally, the bailout package, even if passed, does not seriously address the fundamental problems in the US economy, which essentially is a crippled consumer who now holds mounting debt loads, destroyed home values and ever-increasing shortcomings when it comes to competitiveness with the rest of the world.
The global economic model that we knew and learned in MBA programs has effectively undergone radical changes.

There are only 3 reasons there, not five. So how is it you come up with the figure $250? – Obviously, you have made no case for that number as it is there just to grab attention. You are an idiot and should not be allowed by your employer to publish financial or economic articles.

Hi, i love your oil report and anaysis on the oil i will love to have more as to know what is happening in the oil market. i intend to go into oil trade, i would like have some kind of information.
thanks

Maybe the prices started ropping in July because Bush lilfted the executive order banning offshore drilling and oil traders syterted bailing when they realized that supplies may be increasing. Once prices started dropping, people had to abandon their long positions. The recent drop may be because the congressional ban expired yesterday, making more supply likely.

I also wonder if you're a democrat, since you didn't mention that we could get maybe 1 million barrels/day (MBD) from Alaska, 3 or more MBD from the 85 billion barrels offshore, and a bunch from the 500 Billion barrels in the Bakken formation in Montana, etc.

I thnk peak oil in the US was when the environmental extremists got powerful enough to block a lot of US domestic production.

I wish that people who want to vent about "Democrats" and "environmentalists" would disappear and move over to one of "your own" websites, or just relax with Fox News all day and be happy. I have no idea what Keith Fitz-Gerald's politics are, and I don't even want to know, but just knowing (from some of his published and distributed writings and seeing him in public) that he's a sharp-thinking, globe-trotting, Oregon-dwelling guy who has a goatee and a shaved head, runs triathlons, loves nature, and has a strong affinity for frugal and harmonious traditional Japanese culture, I'm just betting that if anything he'd have more in common with NPR than the Limbaugh-Hannity-Savage blowhard/know-nothing axis, you know what I'm saying? I'm also sure he doesn't harbor any fantasies about oil from ANWR or some mucky tar sands in Wyoming being what's going to rescue the Ford Explorer lifestyle for the USA for another few centuries. Go, Fitz! (By the way, I assumed from the oddly angry, hostile, and contemptuous tone of his post, if nothing else, that "James R. Peters" was a Republican, not a Democrat.)

If oil heads for $250, we will have stagflation that will make the 1980 debacle look like a picnic. Believe me, in the world of 22% prime, nothing worked & neither Bailout Paulson or Liquid Beranke will be capable of plugging the dike. Unfortunately, there isn't a player on the horizion exudiing enough moxey to solve the problem. Stand-up now & say no or its bye-bye single diget inflation.

I think $250 is a little high, for the short come anyway, but no one can deny that all but a few countries have peaked in oil production. The oil shales and oil sands are never going to happen, if there were a technological break through (which I find unlikely), the infrastructure just isn't there, realisticially we are talking 20 years before we could get anything from them, the bottom line is that the housing market is more of a symptom than a cause, the real problem with our country is the price of oil. It doesn't take a genius to compare the stock market in the last 75 years to the real price of oil for the last 75 years and see that they are inversely proportional all the way. Anything in our market is correctable, food, housing, labor, but when it comes to oil, once it's gone, it's gone. Anyone who doesn't want to believe it is wearing as rose colored glasses as the investment bank managers who were so caught up in the market trends that they forgot the part about preparing for the worst in the expression, "pray for the best and prepare for the worst"

Drilling in Alaska and off shore should reduce oil prices, which will reduce many prices, which will help everybody pay his mortgage and reduce forclosures. Therefore, it should also make the bad mortgages better.

I heard that they could get oil off the California coast in 1 year, because it's shallow and has already been expored. Prudhome bay, Alaska took 4 years, so ANWR may take less, since they only have to run pipes 75 miles to get to the pipeline at Prudhome Bay.

From the "land down under" I would like to add that there will be three major factors that will be influencing world oil prices.

1. America's dollar is tetering on the brink of decline – flight to the safe havens (e.g. US Treasury Bonds) whilst the last chance Wall Street bailout goes through its myopic motions will only temporarily halt the inevitable.
2. China, India and the rest of Asia will end up dominating the world's oil demands and unless the USA gets real about weening itself of its oil reliance then it better be prepared for a long period of extended heartaches for big fuel consumers. (An observation: the recent hurricanes in the Gulf of Mexico demonstrated the craziness of market forces in action as oil did not jump wildly – why?).
3. OPEC's membership has too many anti-American countries who will screw the oil prices as high as possible to
a) extract the best price making them 'richer' in the process b) keep the western economies guessing over when the next leap in the ransom stakes will knock their ecomonies backards.

So how can oil production even as soon as a year from now (which is utterly unrealistic!) affect oil prices today?

Offshore drilling has nothing to do with present oil pricing, and won't have anything to do with oil prices until it's entering the market.

Graeme Sargent,

The last chance bailout is nothing but a gift to the banksters caught holding the bag as the collapse unfolded, and will only hurt America, and the global economy, by further weakening Fed.Gov, Americans, and inflating commodity prices. The stock markets are bouncing all around in anticipation because 1) the big money is speculating and shorting as their eyes and ears in Congress alert them in advance as to the course of the votes, and 2) most people naively figure the $Trillion giveaway will do something to stave off the collapse.

It won't, because every nickel that ends up in the banksters pockets will be offshored to countries with hard currencies.

Beyond your item #3, and in addition to it, the massive flood of dollars entering global markets is about to plunge the dollar to a degree heretofore unheard of, and as Mr. Fitz-Gerald has pointed out, this will jack up the price of oil commensurately.

Also, after Georgia was sicced on Russia last month, Russia was capable of wholly occupying Georgia, and the BTC pipeline, and was expected to. When Putin, probably seeing that this economic calamity was about to pop, realized that seizing that pipeline would give Bush and the banksters invaluable propaganda ammunition with which to blame him for precipitating the collapse, refrained, the Big Money had to cover it's bets on the move in oil price that didn't happen. While he did so for his own benefit, Putin has given America, and the world, an incredible gift: a $50/bbl plunge in oil prices.

This covering also helped to moderate the price increases that would have resulted from the anticipated impact on the refinery and offshore oil production industry in the gulf as a result of the hurricanes.

However, there is no reason Russia can't seize Georgia and the Caspian oil now, since there isn't a thing the US, or anyone else, could do about it (as far as I can see) and it's too late to blame the economic crisis on that action.

That, if it does occur, will blow the price of oil far beyond $250, and further increase the amount that Russia leads the world in oil exports by, and it's geopolitical power.

A lot of air under high oil . A lot of air under real estate and investment banks . Both bubbles have burst . Too much government intervention into private business . CONSTITUTION PEOPLE !!!!! The architechs of this debacle should get eaten by the monster they created ,the survivors did things right and will build a better system . It's natures way , and AMERICA'S WAY .

You know, what needs to happen, at least as I understand the Constitution, is that the Federal Reserve Banks need to be seized by the Fed.Gov, the officers thereof charged with crimes of which there is evidence, and the Federal Reserve Act repealed, and the power to issue money again exercised by the government of the people to whom the right belongs.

The banks can take advantage of the improvements in bankruptcy laws they have engineered of late, the bankers that avoid prison can avail themselves of the social safety net that yet persists, and the usury being charged to the American people's account voided, establishing a far more equitable and viable economy for the present, and the future.

I do, in fact, expect this to happen, after this present spasm of fraudulent bailout legislation fails dismally, and the banksters flee with their ill gotten gains to nations with hard currencies.

Fortunately, the precedent established by the Bush administration permits their rendition to justice here, or wherever it may be convenient to hold them while they're being questioned about the financial terrorism that they have undertaken of late.

Dear Valued Customer (comment #17) I feel for you friend, but… Constitution? You want to close the Federal Reserve? By now we all know its not actually federal but rather private. It is not impossible to replace it but its not at all probable.

Reasons: 1. Constitution says Congress shall not abridge the right to contract. The simple translation to this is that we individually or through our representatives can contract ourselves into financial slavery if we want to. That's what happened in 1913 with the passage of Federal Reserve Act. That's what President Wilson said about it later even though he was the execeutive who signed it into law, (…we have sold our children & grandchildren into slavery…)

2. If the USA was the only one outside the international banking system at this late stage of the movement towards consoldidation of money and power, the attempt to operate with the kind of money used prior to 1913 (bank notes based on substance, which is gold & silver) it would cause direct opposition to World Bank and interaction with any other central bank (all nations now have Bank of England/Federal Reserve model in use) would be difficult at best and probably not be allowed by World Bank, Bank for International Settlements and the United Nations because this would be seen as a step backward from world peace. They can't really allow national autonomy indefinitly. It's disruptive. National autonomy causes war. That can't be allowed indefinitly.

Points to ponder: 1. As europe has the Euro so the north american union needs the Amero or something like it.

2. War of 1812 was fought over Jefferson's refusal to renew the banking charter with 'english' bankers. The crown being in debt to the bank had little ability to refuse military assistance in an attempt to force young America to re-up to the very same type of debt instrument now used since 1913 in the US. So, at least America had 100 years of prosperity which it could actually own outright.

This is the new way. The frog has already been cooked. Resistance is futile. Relax.

Oil was $11 in 1999. It has climbed steadily ever since. It is primarily driven by demand growth. All the way up in price people like you said it would go down. It is currently undergoing a healthy, expected correction in price. The small amount of demand destruction in the US, is miniscule compared to demand growth from developing countries like China, Russia, etc. Oil is going much, much higher over the long term.

This is an interesting take on the situation… what does the man on the street do.??? We spoke all week on myinvestorsplace.com …on the forums… in chats… amongest ourselves… but what do we really do…what can we do…????

What are your thoughts..??? Will it make a difference either way the vote goes today?

When the dollar tanks and hyperinflation becomes imminent won't the federal government make everyone hand over their gold in exchange for deteriorating dollars.
? Last time that happened you could keep US gold coins, because that is "specie". So how should we hold our gold? Maybe they will even make us turn in our gold-backed paper.

You analysis is deeply flawed.The bail out will crash the dollar inevitably.

First,how is the bailout financed?China,Russia,The Arabs have had enough of wortless bonds.They will sell once the fed starts merely printing green paper.

Secondly,the US is in its death throes.The muliplicity of deficits are simply unsustainable.The US $ is too faulted to be a serious currency of exchange.Both the US and its citizens have maximised their debt.Banks with money achieve nothing if no consumers borrow more.A spirally pattern of recession leading to depression is inevitable.House prices will drop another 30-50 %.Back to historic means.All returns to the mean.

That is a fast rather limited summation.The fact that markets continue to drop tells you,the public is not conned by government lies.
Regards Stephen

You're brilliant, that's why oil has been going straight down since you wrote this. We could see 70 soon and 50 is possible, but I do believe $200 and more is reachable in the next year or two. We could easily be looking at $8 a gallon for gas or even more in the next few years.

"But I continued to make the opposite argument. And a week ago, the markets made my point for me. On Sept. 22, crude oil futures for October delivery soared $16.37 a barrel, or 15.7%, to close at $120.92, after trading as high as $130 a barrel – thanks to a steep decline in the U.S. dollar and to speculation that the Bush administration’s plan to bail out the financial sector might actually jump-start the U.S. economy, fueling inflation in the process. The gain surpassed the previous record single-day-price gain of $10.75 a barrel, a move that occurred on June 6. [The biggest-ever percentage gain in a single day – 20.9% – was recorded on Jan. 3, 1994, according to FactSet Research Systems Inc.]"

I stopped reading this article right here, and any chance of me subscribing to this report died with it.

Mr. Fitz-Gerald, were you in a coma on the day of September 22nd?

You are correct in the statement: "crude oil futures for October delivery soared $16.37 a barrel, or 15.7%, to close at $120.92, after trading as high as $130 a barrel"

But your reasoning is completely false and it calls your credibility into question. Sept. 22nd is the last day to trade the futures contract expiring in Oct. All shorts either had to settle on that day or actually take delivery of the physical product (can you imagine 1,000 barrels of oil delivered to some brokerage house's doorstep via Navy Pier? neither can I).

It was a classic short squeeze. And, you'll note that the VERY NEXT DAY, oil opened at $106 per barrel. It didn't "gap down" from 120. It OPENED at $106. Because there was a new contract being traded (the benchmark front-month contract).

To anyone that reads this: I am a first year analyst at an investment bank and apparently am better versed in the oil futures market than Mr. Fitz-Gerald. Take his advice/subscription service with a grain of salt.

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